7 common mistakes about KiwiSaver
If you're in KiwiSaver, there's a good chance you and your scheme have had a few misunderstandings.
Most of us are not used to investing in managed funds, so it is not surprising that we sometimes get mixed up.
From angry people demanding to know what happened to their "missing" money to the hopeful folk who think it might help pay off their credit card, the helplines of Kiwisaver providers are clogged with confusion.
Here we clear up seven common misunderstandings by callers to big providers ASB and ANZ.
1. KiwiSaver savings can be used to pay the initial deposit on a home.
Nearly everyone knows that KiwiSaver can be used towards a first home deposit. But many people mistakenly think that means they can use KiwiSaver to pay the initial deposit, the one you typically pay before settlement to seal the deal after you win an auction or a sale goes unconditional.
Sadly this is not the case. Home buyers must have their own money available for this initial downpayment.
As ASB explains to callers, the money from your KiwiSaver account goes straight to your lawyer on settlement day and reduces the mortgage you would otherwise pay on your new abode. You never actually touch the money.
"A KiwiSaver first home withdrawal will be part of the equity you put into your first home and must be used for settlement," says ASB. "Withdrawals are paid to your solicitor, to be paid to the vendor on settlement day."
2. KiwiSaver can be used to pay off a credit card.
You can see your KiwiSaver balance displaying proudly next to your bank account, and it just so happens to be about the same amount as the outstanding balance on your credit card. Surely you can transfer the money across? These days even non-bank KiwiSaver schemes offer online portals that look just like internet bank accounts, giving their savings a misleading air of accessibility.
Roger Clayton, ASB's head of wealth products, says electronic portals help people feel connected to their savings, but the downside is confusion about whether people can access them.
"It is quite understandable. People are looking for ways to pay off that bill and they can see a balance sitting there in their Kiwisaver account," he says.
ANZ, the other biggest provider along with ASB, says most calls to its KiwiSaver help desk are from people wanting to make early withdrawals, whether to buy a house or for other reasons such as hardship or illness.
But the bar to get your money is set deliberately high, says Ana-Marie Lockyer, general manager of products and marketing at ANZ. "KiwiSaver is a long-term savings vehicle."
If you want to break in, Clayton says unmet demands for electricity or mortgage payments may qualify, or modifying your house to fit a newly disabled family member.
A giddy pre-Christmas splurge on the credit card will not. "Leading up to Christmas we tend to get quite a few applications for serious financial hardship," says Clayton. "But Kiwisaver is for retirement purposes not for paying off short term credit card debt."
3. You must close your KiwiSaver account when your turn 65.
You can tap into your KiwiSaver money as soon as you hit 65 and have been in the scheme for five years. But you don't have to close your account, says ASB. Many providers let you make regular withdrawals if you don't need all the money right away.
In the early days, when balances were tiny, only about a third of people immediately closed their accounts, but these days roughly half do, says Clayton.
He says it is worth thinking carefully before closing your account. If you stay in the scheme you will no longer be entitled to government contributions and your employer may also stop contributing (or if you are employed they may keep going). But KiwiSaver gives you access to a diversified investment that is cheaper than most of its rivals, says Clayton. "The management fees are typically materially lower than an equivalent non-KiwiSaver fund. And remember once you are eligible ... the lock-in falls away," he says. Once you empty and close your account, you won't be able to open another one.
4. It takes a few days for contributions to reach your KiwiSaver account.
Waiting for your nest egg to grow can feel about as satisfying as watching paint dry. Not helping matters is the three-month delay between seeing contributions disappear from your pay packet and having them appear in your KiwiSaver account. ASB's support desk receives many queries along the lines of "where the *% ! is my money?".
So where exactly is your money before it shows up in your KiwiSaver account? "During month one, if you are employed, each payday your employer deducts KiwiSaver contributions from your salary or wages," says ASB. "During month two, your employer sends your KiwiSaver contributions to Inland Revenue and they check that the information (from your employer) is correct."
"During month three, Inland Revenue transfers your contributions plus interest to your KiwiSaver provider."
It may seem a long time to wait for a transfer but Clayton says the tax department has a surprising amount of work to do. "You can imagine how many employers are making these deductions so it can take a while to make those checks. And a lot of employers don't get it right. People don't appreciate that Inland Revenue finds quite a few errors and often has to clean up the payroll deduction."
The good news is that Inland Revenue pays interest for the days it holds your money.
And if you just can't wait, it offers an online service called "My KiwiSaver" allowing you to track your contributions before the money hits your account (see kiwisaver.govt.nz).
5. It is best to remain in the default fund.
If your employer does not have a preferred KiwiSaver scheme and you do not pick your own, you will be put in a default scheme by Inland Revenue. Many people don't realise they can still choose another fund to invest in at any time, says Lockyer. Default funds are designed to be lower-risk with higher levels of cash and fixed interest investments (for example bonds and term deposits) than most funds. They are also required to have relatively low fees.
If you want to see whether the default option is best for you, which will depend on your age, plans and personality, ASB says: "Most KiwiSaver providers have a short questionnaire that you can use to help you to select an appropriate fund to suit your goals, investment timeframe, investment experience, and how you feel about investment risk (the possibility of getting back less than you invested or a return less than you expected)."
"It's important to select a fund that suits your own goals, because your fund option will have an impact on your investment outcomes over the long term."
6. A KiwiSaver account is like a bank savings account.
A KiwiSaver fund is usually a managed fund that invests in several different kinds of assets such as shares, bonds, term deposits and commercial property in different proportions, depending which one you choose. Its value may go up and down, and you hope that in the long run the value will grow significantly.
The amount that ends up in your KiwiSaver account depends on the provider's fees, market movements and the investment decisions of the people who run your fund. This explains why the dollar value of your nest egg will not exactly match the number of dollars you, your employer and the Government have contributed to your account.
ASB explains: "Contributions to your KiwiSaver account buy units in your chosen fund or funds. Your contributions plus any government and employer contributions are invested in your fund, where they are combined with the savings of other KiwiSaver scheme members. The funds hold assets. As the assets rise and fall in value, so too does the value of each unit."
7. KiwiSaver is guaranteed by the Government.
The government invests a lot of money in making KiwiSaver attractive, for example by chipping into your fund every year if you make the minimum payments. But it does not guarantee the absolute safety of your savings.
"No KiwiSaver scheme is guaranteed by the government," says ASB.
However: "Each KiwiSaver scheme must appoint a supervisor (currently called a Trustee), must meet reporting obligations and is subject to the regulatory supervision of the government regulator (the Financial Markets Authority).
Written by Eloise Gibson. First appeared on Stuff.co.nz.
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